Update on Two New Duplexes: Maintenance Catch Up Status

On September 25th, we closed two new duplexes in Chatham. This is my first time working with a property management company. The company I am using is amazing (knocking on wood). They collected October rent from all of the tenants quickly, so transition was very smooth. Now, they are working on various required fixes and catch-up on maintenance. Communication is outstanding! The company office manager keeps me in the loop on all of the progress and replies to my questions very thoroughly.

I am truly grateful for their help.  Here is a list of items that need to be addressed, with some of my comments. Priority #1 are the most important and 5 least important. I'll post updates to this post as things get done.

Last updated: Nov. 3rd, 2017

Duplex A (#41 J)

Priority #5 - nice to have down the road:

• Insulation blow guys - Attic add insulation
• Done Oct 24 2017 Electrician - inoperative ground fault circuit interrupters (external)

Priority #4 - roof on porch is starting to rot:

• Roofer - replace shingles on the front porch. Add ventilation

Priority #3:

• Handyman - some missing bricks in foundation walls - patch with cement or add bricks
• Done Oct 24 2017 Handyman - finish painting the deck. It is half painted
• Handyman - need a new dryer vent
• Handyman - some bulbs need to be replaced in 2nd floor unit
• Done Oct 24 2017 Handyman - missing cover plates - external & basement
• Handyman - new filter for the furnace - 20 x 20 x 1
• Done Oct 24 2017 Roofer - downspout - extend front corner away from house
• Roofer/Handyman - siding is lose and needs to be fixed (wind can blow siding off and cause issues)

Priority #2: - Moisture and water issues. I think this will cause a lot of damage if we postpone for too long.

• Contractor - 2nd floor bathroom - renovation (toilet leaking & bathtub water/wall damage, need fan)
• Contractor - 2nd floor - mold & water stains on walls in bathroom, hallway, and bedroom(?)
• Contractor - 2nd floor - check windows, some are water damage; storm glass broken
• Contractor - 1st floor bathroom - caulk & grout
• Contractor - 1st floor - ceiling stains from bathroom above
• Contractor - add a 4x4 post (notched joists) -?? I am not 100% sure what this was about...

Priority #1: 

• Furnace serviceman - get service for the furnace (basement & 2nd unit). Old furnace. Inspector was not sure if heat will come on. 
• Done Oct 24 2017 Inspection by heating/cooling company: one of two heaters is not making heat (fan was running) and unit to old, so new parts cannot be found.
• Done Oct 24 2017 Furnace filter changed
• Done Oct 27 2017 Heating company temporarily resolved the issue. Heater is currently working, but needs to be replaced. Property management is looking into finding a replacement unit
• Done Nov 2 2017 Cost to replace with a pre-owned (aka used) unit ~$1700. Replacement is being scheduled.
• Done Oct 31 2017 Increase rents
• 90 day notice provided: Eff. March 31, rents will increase by 1.8% according to Landlord and Tenant Board Guideline

Duplex B (#141 S)

Priority #5

• Future: House slopes inward towards the middle 
• Future: might have to add electric heater to far end of 1st floor unit

Priority #4

• Handyman - Flooring - 2nd floor carpet is partially removed - will need new flooring
• Handyman - Walls - 1st unit - damaged(?)

Priority #3 - I THINK THIS IS IMPORTANT

• Tree cutter - clean all branches off the roof & trim big tree - Tree branches scrape the roof,  will be heavy in winter and will most likely shorten roof life by a lot.

Priority #2 - I think this is all doable and should be fairly quick

• Handyman - remove shed - tenants complained and it looks like a potential safety issue
• Done Oct 24 2017 Handyman - add railings to front & side, fix loose railings (rear)
• Done Oct 24 2017 Handyman - trim trees near walkways (trip hazard)
• Done Oct 24 2017 Handyman - some rot on deck, boards should be replaced
• Handyman - interior wire used for external light (replace)
• Done Oct 24 2017 Inspection by electrician
• Handyman - caulking of external light
• Handyman - install cover plates where missing in the basement
• Handyman - 2nd floor - toilet running & caulk & grout bathtub
• Handyman - 1st floor - toilet leaking & caulk & grout bathtub
• Handyman - Install missing screen on one of the windows
• Handyman - weather stripping on the doors

Priority #1

• Furnace - get service and cleaning for the furnace - less critical than in 41 Joseph, but should be done before it gets cold.
• Done Oct 24 2017 Inspection by heating/cooling company: one of two heaters has been condemned and needs to be replaced
• Done Oct 25 2017 Quote for new heater ~3K
• Done Oct 31 2017 Increase rents
• 90 day notice provided: Eff. March 31, rents will increase by 1.8% according to Landlord and Tenant Board Guideline

How (NOT) to Buy Rental Property with Positive Cash Flow

Signs Of Trouble

Signs of Trouble

I am fairly superstitious and have to admit that I constantly knock on wood and spit over the left shoulder. So I should've known better when I purchased house #66 with unit 6...

It turned out 666 was probably one of the most valuable experiences of my life. Simply because it provided me with an opportunity to learn how to be a landlord hands-on.

I also learned what NOT to do when you buy a property with positive cash flow.

Clues I Ignored

Looks Great, but 66% Vacant

Unfortunately, I was so in love with the idea of purchasing a six-plex that I didn't pay close attention to the following signs of trouble.

After the inspection I knew that, out of 6 apartments:

• A unit was used by the seller as a storage.
• Another unit was used by the seller's girl friend as a storage.
• One more tenant just left last month.
• A tenant was being evicted for non-payment before closing.

My Thought Process at the Time

Totally Oblivious

Back then, it all seemed just fine to me! 

Sure - it is okay that the seller and his family are using two units. I knew the seller had the building for over 30 years. My assumption was that the mortgage was paid off over this time. So he probably didn't have to worry about income & expenses that much. Therefore, why wouldn't he use a couple of units for himself?

It also made complete sense to me that if a tenant left just before the building was put for sale, it would be better that the unit remained vacant.  My preference was to find my own tenant, increase rent to market, and have everything under control going forward.

Lastly, eviction seemed as really great news to me. In fact, with all my heart I was grateful to the seller for letting me know about the issue and going through the eviction process before closing. I knew it was much better to have another vacant unit, than to get a non-paying tenant right off-the-bat. 

What Did I Miss?

All of the thoughts were self-talk. I convinced myself that the situation was perfectly acceptable. I didn't look at the numbers, knowing that at least 3 units were vacant.

Lesson 1: Never Buy Based on a Pro-Forma Statement

Find Your Truth

When you purchase a rental property, seller provides an income statement, which shows rents collected and expenses paid.  

In most cases, you'd get a pro-forma statement instead of an actual income statement. Key differences between pro-forma and actual:

• Pro-forma shows what income would look like, if all tenants paid you market rent every month. Then a market vacancy rate is applied (ex., 2%).

• Actual income statement shows the money that was collected during a year or last 12 months.
• On pro-forma, some expenses are adjusted from actual. For example, the seller might subtract 25% from electricity cost because the government is planning to issue a refund up to 25% next year.
• Actual income statement would show you an amount exactly as on utility bills.
  
  
• Only vital expenses are shown: Utilities, Insurance, and Property Tax.
  
  
• Actual income statement would also include other common expenses: property management fee, garbage removal, snow/grass care, handyman, plumbing, fire inspection, cap-ex, etc.

Lesson 2: Always Verify All Numbers 

Be a Detective

To make sure I am operating with actuals rather than pro-forma, my rule of thumb now is to double check every number. I then put worst case amounts on my property evaluation spreadsheet. This helps me understand if the property is a good or bad investment at the purchase price.

To do this, I find an alternative source of information to check both rents and each of the expenses.

Here is how I go about it:

• If landlord pays water, I call the city and confirm what they typically estimate for water expenses. In one of the cases, city staff told me they use $55 per person per month, for every other month. So now, if I see a 2 bedroom apartment, I estimate water at 4 people x $55 x 12 / 2 = $1,320 per year.
  
  
• Similarly, if landlord pays electricity or gas, I call local vendors and confirm typical costs for a year for a similar property.
• On the city website, I find out the expected increase in property taxes for next year. I use next year's tax amount in my calculations. You can also look at several similar properties on MLS (Realtor.ca) and check taxes and see if there is any information regarding changes to property values in the area on MPAC.
  
  
• It helps greatly to call several property management companies in the area and confirm their fees for managing a property of similar size in the same location. You can also confirm and make sure the area is not a D area (D for drugs, disaster tenants, etc.), ask about typical costs for snow / grass and any other services property manager provides to their clients, and verify current market rents.
  
  
• Your real estate agent can help you find out from the seller how they handle garbage, snow, and small fixes. Often, this gives insight into pricing and scope of additional contract services.
• Confirm current market rents on Kijij. If units already have tenants, I always use current rent (especially if market rent is higher). It takes time to turn tenants over, so it's safer to stay conservative on income side.
  
  
• For Vacancy rate, I use 5%. This is what most lenders would use in their underwriting as well.
• Don't forget to budget for minor fixes and major upgrades per inspection.

Happy End

The biggest mistake in my numbers was around the cost of utilities. Since 3 units were vacant,

Have Fun Learning!

utilities listed on pro-forma statement were a lot lower than actual. After the purchase, it turned out that utilities cost was twice what I thought it would be. This resulted in a negative cash flow at the price that I paid for the property.

As a wise real estate coach once told me: "In real estate, time corrects all mistakes".

Over two years, we renovated all units. Got good tenants in all of them. Increased rents to market. Separated electrical meters. 

With a little bit of luck, some market appreciation and an awesome real estate broker, we sold the property and broke even. 

Big bonus - I learned a ton.

How I Approach Inspections for my new Rentals

I am in the process of acquiring three new rental properties: a two bedroom single home and two duplexes. Inspections took place yesterday and I'd like to summarize my approach and some of my key take-aways.

Knowledgeable Home Inspector

It's important to get an inspector who knows his trade very well and has lots of experience. Usually, your real estate agent can recommend a good inspector to you in the area.  Make sure that both your real estate agent and the inspector specialize in investment properties of the type you are interested in. 

In my case, I am after older singles, duplexes, and triplexes that need some clean up / modernization and catch up on maintenance but have good bones and structure. The inspector who went through the houses with me yesterday was recommended to me by my real estate agent.  He is a retired construction company owner and has built over 30 houses start to finish in the town where I am buying. In addition, he has framed and re-framed over 130 houses; and has worked in a leading hydro company for many years. 

Don't be afraid to tag along with your inspector and ask questions. It's your opportunity to learn about your property and plan out how to address key issues.

Goals for the Inspection

For every small property before I make an offer, I automatically add a budget for repairs and maintenance that I expect to spend within the first 1-2 years of ownership. During inspection, I assess if the budget I have in mind will be sufficient or needs to be adjusted. I look at the worst case projections after the inspection and figure out if the investment still makes sense.

During inspection, I follow the inspector, ask him (I haven't run into a lady inspector yet!) to tell me about key priority items and repeat back my understanding to him. My goal is to walk away with three things:

1) Any small but high priority items that must be fixed ASAP 

2) Major (most costly) items that must be fixed as soon as possible and their approximate cost

3) Answers to the questions for my insurance agent, so I can get a quote on insurance

Typical Small High Priority Items

Water Related 

Anything water related can cause a major issue if you don't address the root of the problem promptly. For example, once a tenant told my husband that she thought she heard an annoying drop behind her shower wall. My husband came by and didn't hear anything major, so we decided to wait and see how it goes. Several days later, the tenant called us at 10 PM and said that water was rapidly flooding into her bedroom from under the floor... It turned out the annoying drop was coming out of  a rotted pipe that was about to burst. In my experience, water situations end up really costly and in many cases are preventable, so at inspection I keep track of things like:

• Caulking in the bathrooms and kitchens
• Missing water stoppers and shower curtains without magnets
• Leaking toilets or faucets
• Clogged toilets 
• Clogged or slowly draining sinks
• Eaves plugged with leaves or dirt
• Missing down spouts or parts of them

Keep Good Tenants Happy

Tenant turn over is costly. If I run into a good tenant (i.e. unit looks clean and taken care of!), I always ask them if there are any items they'd like to get addressed. For example, a tenant that I saw yesterday shared with me that he loves the place and the only thing that would really help him is having a washer / dryer at the house. I will definitely add a coin laundry as soon as possible. This will help me keep the tenant happy and get some additional cash flow as well. Missing mosquito nets on windows is another frequent complaint that can be easily resolved.

Safety Concerns

Health and safety related items should always be first to be addressed. I believe in being safe rather than sorry. Here are some items you can take note of during inspection:

• Sufficient number of functional fire alarms
• Railing on all stairs
• All outlets must have covers
• Lose or missing posts in a balcony railing
• Mold in the bathroom or on window seals
• Wires touching steel pipes in an unfinished basement
• Missing brackets that hold hydro cables on the side of your house.

Other Things Per Inspector 

Make an effort to address as many items as possible of the ones that your Inspector points out to you as important (no matter how small they are). Here are some examples of what I have on my list now based on the inspection yesterday:

• 2 feet of galvanized pipe to be replaced with copper
• Furnace needs serious cleaning
• Get electrician to replace some knob-and-tube (to be honest, I wrote down what inspector told me but had to google this term he-he)
• Lock up unsafe garage and don't let tenants use it 

Tally Up Bigger Items

Here is what usually goes onto my bigger items list. I typically get houses with existing tenants. However, my list includes all updates that I'd have to do to make a unit look fresh and relatively modern as soon as one of existing tenants moves out. The benefit is that you can get a great new tenant and increase the rent to market. Also, it is crucial to make sure deferred maintenance doesn't build up.

Note: only keep track of what is applicable in your situation. You don't have to worry about all of the below! But you'll likely have 2-3 major items if you are buying an older property.

External:

• Roof: 3-5K (Flat roofs are more expensive)
• Garage door: 1.5K
• Eaves & Siding fixes: 1 - 2 K get a quote from your roofer
• Trim a gigantic tree: 1.5K

Internal:

• Replace / remove old carpets or other flooring: 5K
• Bathroom renovation: 5K
• Add fan to a bathroom and paint/clean: 1.5K
• Kitchen renovation: 5K
• Paining & wall patching: Size of house times 2.5
• New LED light fixtures all across: # lights times $40
• New furnace / water tanks: Get rental and add to monthly expenses
• New toilet: $250 times number of old toilets
• Dispose of a ton of garbage: $500 
• Cockroaches: $500
• Bed bugs: 1.5K plus a big head ache
• Freshen up a small and relatively tidy unit: 5K
• New outlets, switches, and covers all across
• New white blinds on all windows
• New thermostats
• New door knobs and locks
• A fresh coat of paint

I typically notice that a relatively clean and small unit takes 3-5K. A townhouse with several bigger items takes 10-15K. Sometimes things go wrong all at once and I spend 25K on a house within the first year. 

One of the property managers that I love reading and listening to and have learned a lot from is Nick Sidoti (http://www.drcashflow.net/). Nick says that there is no deferred maintenance, but there are owners who don't take care of their properties.

Mistakes Avoided and Made

I had once walked away from a property with foundation and structural issues. The house was a century house with wooden foundation. Inspector pointed out to me that almost all of the structural elements seem to have been moist over a long period of time (years) and water caused so much damage that I would have to address this ASAP.  My gut feeling told me that it would be a few additional thousands on top of my typical "internal/external" wear and tear items described above and I decided that I'm not yet prepared to take on such a major project. 

Besides house inspection, I always revisit market research, re-evaluate cash flow potential from the property I am purchasing and assess all key day-to-day expenses (taxes, utilities, insurance, mortgage) at the time of inspection. In one of the deals, I noticed as part of my checking that MPAC assessment value was more than twice lower compared to the purchase price and that taxes on a property decreased by 2 times in the last four years. This was unusual for me, so I started looking further and discovered that I was about to pay twice the current market price. I was happy I re-checked and didn't get myself into trouble.

Once, I purchased a property for a lot higher price than I should have. This was because I underestimated the cost of electricity. In a 6-unit building, the seller only had 2 units in use, but made it seem as if 4 were occupied. Timing coincided with a spike of hydro costs in Ontario. Unfortunately, this was one of my early purchases and I didn't know how to estimate utilities properly. Cash flow was negative. Tenant issues added to the trouble. After holding the property for two years, I successfully sold it and broke even thanks to hand-holding from one of my real estate coaches Don at Dave Lindahl's group (https://rementor.com/). This was a great learning experience.

Info I Provide To My Insurance Agent

During inspection, I always confirm all the info I have to send to my insurance agent, so she can help me with an insurance quote. Here is the list of insurance questions and #10 is what you should get during the inspection:

1. Who will be the registered owner of the property? 
2. Are all the units occupied? 
3. Are any of the units rented to students? 
4. Are there annual leases with all tenants? 
5. Do you require that all tenants carry insurance? 
6. What is the annual rental income for all units? 
7. Who is responsible for the maintenance of the property including snow removal? 
8. What building limit do you require? 
9. What limit of coverage to you require for the appliances (laundry, fridges & stoves)? 
10. Please provide information regarding the updates:

a)      Roof – type of roof, when updated? 

b)      Heating – type of heating, when updated?

c)       Electrical – type of electrical, fuses or breakers, what ampage, when updated? 

d)      Plumbing – type of plumbing and when updated?

I hope this article is helpful! Ping me if you come across it in the WWW and would like to bounce off ideas. Also, please ping me if you'd like to add or adjust any of my findings based on your experiences, so we can keep growing this cash flow knowledge base and help out others who'd like to learn.